China Is The New Ultimate (Opaque) Ad Tech Exit

Western ad tech companies looking for an exit only have a handful of choices.

They can IPO like The Trade Desk (not likely), get acquired like Yahoo (slightly more likely), sell to private equity like Marketo or Mediaocean (only an interim solution) or, as is now becoming the trend, find a Chinese consortium with an appetite for ad tech and capital to match.

Recent examples include NativeX, Smaato, Opera Software and, most recently, Media.net, which got scooped up by a Beijing-based telecom company called Miteno Communication Technology on Monday.

China investments in the US in general are on a serious uptick. According to economic research firm Rhodium Group, Chinese companies are expected to sink between $20 billion and $30 billion into the US this year versus $15 billion in 2015.

The China exit is looking more and more attractive – even if the China market is far from transparent or easy to navigate.

“If you’re in ad tech, your ultimate exit is China – companies that can pay cash so your investors and your management team can get liquidity,” said Elgin Thompson, managing director of Digital Capital Advisors. “These companies will pay the full price and, in some cases, an obscene price – and, in some cases, depending on the diligence, what some people may consider an unjustifiable price.”

For Media.net the price tag was $900 million. But is a $900 million deal really a $900 million deal in China?

That depends. The yuan is routinely manipulated by China’s Central Bank. The government has both spent hundreds of billions of dollars in foreign exchange reserves to bolster its currency, mainly to keep capital from draining out of the country, and has taken steps to devalue its currency, some say in an effort to help Chinese exports sell more goods abroad.

“We don’t know exactly what’s happening with the regulatory regime in China or with the currency – whether the underlying currency is devalued or whether the government is artificially propping it up to make China seem like a very attractive destination because it’s willing to pay five times as much for something as anyone else around the globe,” Thompson said. “The fact is that it’s opaque, and that brings risk, which makes getting acquired by a company in China into a risk/reward situation.”

It’s the risk of staying in the US and doing nothing or shuttering versus the reward of “being able to take a little off the table and try your lot in the world’s biggest marketplace of the future,” Thompson said.

But a little fire has been lit under Chinese acquirers to make foreign investments before the yuan falls any further, whether that’s in real estate, luxury goods, bitcoin, a stake in Liverpool Football Club or ad tech.

Potential acquirers in China believe Chinese currency will weaken over the next couple of years, which means that a US dollar today is cheaper than it will be a few years down the line, said Rajeev Goel, CEO and co-founder of PubMatic.

“In that case, it would be wise to do acquisitions sooner rather than later,” Goel said. “And regardless of where the money is coming from, a number of these players are probably eager to move their money outside of China because of real or perceived instability.”

But where is the money coming from exactly? Although Media.net’s new owner Miteno is reputedly acquiring the tech to give itself some digital chops, Miteno is not supplying the vast majority of the cash – that’s coming from a list of unnamed Chinese institutional investors. Miteno only has about $23 million in cash on its balance sheet.

“If it’s not clear where the money is coming from, then the motivation of these investors is also unclear,” Goel said. “They might be institutions, but they might also be private investors who have amassed wealth and want to move it somewhere safer.”

That doesn’t mean these conglomerates don’t have an interest in making big bets on digital advertising by revivifying traditional companies like Miteno – or that a company like Spearhead Integrated Marketing Communications Group, the Chinese offline marketing service provider that acquired mobile SSP Smaato in June for $148 million, aren’t gung ho about diversifying their offerings with digital ad tech.

“In a sense, who cares where capital comes from as long as it’s legitimate?” said Kamakshi Sivaramakrishnan, CEO and founder of Drawbridge. “Not every acquirer needs to be Baidu, Alibaba or Tencent.”

And the fact that people in the West might not have heard of companies like Spearhead or Miteno until they shell out on Western ad tech doesn’t make them “any less real” as potential acquirers, Goel said.

“It just means that in the Western world we have a lot of work to do on educating ourselves on who these companies are and what they’re trying to do,” he said.

But it’s also true that the BAT companies – Baidu, Alibaba and Tencent – dominate the China market and set the tone. If BAT isn’t interested, then maybe it’s not that interesting.

“I think [Miteno] did enough financial [due diligence], but not enough product due diligence,” said Andy Fan, CEO and founder of Shanghai-based fraud detection company RTB Asia. “[Baidu, Alibaba and Tencent] have the best data and talent to evaluate deals, and any deal that the BAT companies left for other buyers/investors must be for either a pricing or a product reason.”

Regardless, it was good exit for Media.net. It’s pretty unlikely there were any $900 million offers in the US, ad networks just don’t IPO anymore and a private equity firm probably wouldn’t have paid a penny over $100 million, Thompson said.

And aside for whatever plans the Mitenos and Spearheads of the world have in mind, that makes China hugely alluring as an exit strategy.

“Trust me, every ad tech player of size with enough revenue is begging for someone from China to buy them,” Thompson said. “And the fact that Media.net was saved by Miteno – that makes them look like rock stars."